Angel News Pres 26 Jan Latest


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Angel News Pres 26 Jan Latest

  1. 1. Management Buy-outs Mike Wright Centre for Management Buy-out Research Angel News Presentation 26 January 2010
  2. 2. Centre for Management Buy-out Research <ul><ul><li>Identified emergence of UK buy-out market early 1980s </li></ul></ul><ul><ul><ul><li>Organised first European buy-out conference in 1981 </li></ul></ul></ul><ul><ul><li>Centre for Management Buy-out Research (CMBOR) </li></ul></ul><ul><ul><ul><li>Established 1986 at Nottingham University Business School as first centre focusing on private equity </li></ul></ul></ul><ul><ul><ul><li>To examine developments in UK & European buy-out markets in comprehensive and independent manner </li></ul></ul></ul><ul><ul><li>25 years of research into MBO/MBIs </li></ul></ul><ul><ul><ul><li>Established world leading database of buy-outs </li></ul></ul></ul><ul><ul><ul><ul><li>Currently >27,000 buy-outs in UK and Europe </li></ul></ul></ul></ul><ul><ul><li>Publications generated from database including: </li></ul></ul><ul><ul><ul><li>UK Quarterly Review and European MBO Review </li></ul></ul></ul><ul><ul><ul><li>Approximately 300 academic papers and 25 books </li></ul></ul></ul><ul><ul><li>Database used for detailed academic, policy & commercial studies </li></ul></ul>
  3. 3. Private Equity and Buy-out Trends <ul><li>Difficult year was again predicted and realised for 2009 </li></ul><ul><ul><li>Whole market affected not just top end </li></ul></ul><ul><ul><ul><li>£10-£100m deals at 30% of numbers against 46% in 2008 </li></ul></ul></ul><ul><ul><li>Final 2009 total PE backed value lowest since 1995 at £4.7bn </li></ul></ul><ul><ul><li>Deals now completed with far higher levels of equity and appearance of all equity deals </li></ul></ul>
  4. 4. UK Buy-out/Buy-in Trends
  5. 5. UK Buy-outs/Buy-ins £10-100 million Mid-market badly hit also
  6. 6. UK MBOs below £10 million <ul><li>Fall in number and value of sub £10 million deals continues </li></ul><ul><ul><li>Most now not Private Equity backed </li></ul></ul>
  7. 7. Private Equity and Buy-out Trends <ul><li>Shift to Receiverships and Divestment as Deal Sources (No. Deals %) </li></ul><ul><li>Entry EBIT Multiples Down Sharply After Increasing Over Many Years </li></ul>
  8. 8. Receiverships Increasing Source of Buy-outs
  9. 9. Industry Sectors by Value (% of value)
  10. 10. UK Buy-out Deal Structures by % Finance marked contrast to recession of early 1990s
  11. 11. MBO/I Management Contribution (%)
  12. 12. MBO/I Management Equity Stake (%)
  13. 13. Reasons for Sale of the Business CMBOR/EVCA Impact Study
  14. 14. Management motives for MBO <ul><li>Management motivation and expertise is critical to success of the NewCo </li></ul><ul><ul><li>Desire for independence </li></ul></ul><ul><ul><li>Motivation by capital gain </li></ul></ul><ul><ul><li>Believe target has improved prospects as an independent entity </li></ul></ul><ul><li>Family Buy-outs </li></ul><ul><ul><li>Succession Issues </li></ul></ul><ul><ul><li>Capital Transfer Tax </li></ul></ul><ul><ul><li>Desire to Maintain Independence </li></ul></ul><ul><ul><li>Reluctance to Sell to Competitors </li></ul></ul><ul><ul><li>Absence of Internal Management? </li></ul></ul>
  15. 15. Family Firm Buy-out Negotiations <ul><li>In 43% vendor and management shared relevant information equally, 42% vendor controlled all or most information, 15% management controlled most or all of relevant information. </li></ul><ul><li>No succession planning in over 20% and only 1/3 planned succession two or more years before </li></ul><ul><li>46% indicated a mutually agreed price had not been negotiated, of which 27% reported vendor proposed fixed price that maximised their valuation. </li></ul><ul><ul><li>A further 11% reported the vendor suggested a fair price in best interests of the company. </li></ul></ul><ul><li>Negotiations less likely to involve a mutually agreed price where succession process driven by the vendor. </li></ul><ul><li>Vendor controlled all or most of relevant information in MBIs </li></ul><ul><ul><li>highlights problem for outside purchasers & suggests caution in deal negotiation; often hidden problems difficult to identify in due diligence </li></ul></ul>
  16. 16. Exit Numbers and Values Have Plummeted <ul><li>Shift to receivership exits </li></ul><ul><li>Secondary buy-out exits down sharply </li></ul><ul><li>IPO exits disappeared for two years but recovery in 2010 </li></ul><ul><li>MBIs typically have higher failure rate than MBOs </li></ul>
  17. 17. Holding Period (months) Most are not quick ‘flips’
  18. 18. Performance and Failure <ul><li>Buy-out profitability greater than non-buyouts over first 3 buy-out years </li></ul><ul><li>Buy-outs improve productivity from below industry productivity before buyout </li></ul><ul><li>PE buyout failure vs non-buyout failure </li></ul><ul><ul><li>7million firm years 1995-2009 including all UK companies </li></ul></ul><ul><ul><li>Leveraged firms [of any kind] more likely to fail </li></ul></ul><ul><ul><li>Buy-outs where directors previously failed, more likely to fail </li></ul></ul><ul><ul><li>After taking into account leverage and other factors: </li></ul></ul><ul><ul><ul><li>PE backed buyouts post 2003 not significantly different in failure likelihood than non-buyouts </li></ul></ul></ul>
  19. 19. What Drives Performance Changes? <ul><li>Divisional deals greater growth in sales, efficiency & profits than family & secondary deals </li></ul><ul><li>Buy-outs involve growth and NPD not just cost cuts </li></ul><ul><li>Management equity largest impact on returns </li></ul><ul><ul><li>After adjusting for management selecting an attractive deal </li></ul></ul><ul><li>Active PE firm monitoring important </li></ul><ul><ul><li>Industry specialism & experience of deals done </li></ul></ul><ul><li>Skills base to add operational value likely to become more important, with less reliance on leverage </li></ul><ul><ul><li>Need for close understanding of business models of investees </li></ul></ul><ul><ul><li>Close, active involvement in boards </li></ul></ul>
  20. 20. Private Equity Prospects <ul><li>2010 outlook more positive </li></ul><ul><ul><li>Recent announcement of more larger deals than for some time [5 in Q4 above £100m) </li></ul></ul><ul><ul><li>48% increase in Q4 in PE backed deals to £943m </li></ul></ul><ul><ul><li>Upturn in PE backed PTPs in Q4 [4 of the 9 for 2009] </li></ul></ul><ul><li>Times to exit likely to be up to 2 years longer overall </li></ul><ul><ul><li>Likely surge in build-up deals to add value over a longer period </li></ul></ul><ul><ul><li>Gartmore IPO in 12/09 & Likelihood of IPOs in 2010 </li></ul></ul><ul><ul><ul><li>But limited share of exit needs </li></ul></ul></ul>
  21. 21. Thank You! <ul><li>Further reading: </li></ul><ul><li>John Gilligan and Mike Wright, Private Equity Demystified, 2 nd Edition, ICAEW, 2010 </li></ul><ul><li>Downloadable from </li></ul>